FIrst of all, we are not quite sure why Ambani Organics is called Ambani Organics considering its promoters are Mr. Rakesh and Mrs. Apooni Shah. But they have decided to call it that and we must say it has indeed got a nice ring to it.

Ambani Organics Limited is a manufacturer, processor, importer, supplier and exporter of water based speciality chemicals used in Paper Industry, Paint Industry, Textile Industry, Carpet Industry, Adhesive Industry, etc. Now, what are specialty chemicals? Well, these are special chemicals used in paints, papers and adhesives. They started operations back in 1987 and have been in business for quite some time.

SO, WHAT'S NEW?

But today, the company admits that there is intense competition from both the organized and the unorganized sector. What this means is that, the company cannot dictate terms to its customers and suppliers and as such will have to offer better credit periods to its customers to get more business.

This in turn puts pressure on meeting its working capital requirement and the company will have to raise more money to scale up their business. This is where your money will go if you were to invest in the IPO. The company will use most of the proceeds to fund its working capital for the next year.

HERE IS THE PLAN

The company currently takes about 102 days to collect payment from their customers and about 119 days to pay their suppliers. They now want to start paying their suppliers sooner and give more time to their customers to pay up.

Particulars

Holding Levels (FY 17-18)

Estimated Holding Levels (FY 17-18)

Inventories

70 days

79 days

Trade Receivables

102 days

112 days

Trade Payabales

119 days

105 days

IS THIS SUSTAINABLE?

Well hopefully the company decides to bring down their receivables and their holding periods soon. While they can meet the working capital requirements for the next year using IPO proceeds they can’t do the same every year. They will have to rely on banks to meet future requirements and these funds don’t come cheap. Currently their interest expense is reasonable but it can quickly spiral out of control if they don’t pay attention to their receivables
.

The reason why we are stressing on said elements is because the company’s receivables and inventory levels have seen disproportionate increases over the past few years. Now this could be due to any number of reasons. But companies mostly do it to pursue growth and in this pursuit of growth, they sometimes pay very little attention towards piling inventory and their ability to collect payments. Hopefully, Ambani Organics can keep their receivables under control can find other avenues to boost growth.

Since we have already spoken about the company’s pursuit for top line growth, let us talk about their financials. The company’s top line has in fact been growing for the past few years. Their profits too have followed the same path although margins have largely remained very slim. They did make losses in the financial year ending 2015 and 2016. This, the company says was due to a fire in the facility that affected business operations and hence, a one-off phenomenon.

The DRHP doesn’t provide us with details on how the promoter expects to improve margins except asserting that the company has started to focus on high margin low volume products off late. This, they say is also the reason why the company hasn’t been able to utilize their capacity fully. Here is a chart describing the company’s capacity utilization, it continues to hover around 50%, and the promoters expect it to stay that way.

IS THERE A COMPETITIVE ADVANTAGE IN RESEARCH?

The company says it does. Considering it’s a manufacturer of specialty chemicals, the company can charge a premium if it offers a better alternative to existing options. The only way to achieve this is however is through research or collaborations that will yield similar results.

Now we poured through the DRHP and we couldn’t find how much money they had allocated to research. We checked if research was clubbed together with Other Expenses and the DRHP explicitly states that other expenses include fuel charges, electricity expense, Terminal Handling & Vassal Charges, packing expenses, carriage inward etc. No mention of research again. So, even if the company is spending on research we can’t really say how much.

IMPORTS & EXPORTS

Also, the company does some importing and exporting as well. In FY 2018 on a restated standalone financial statements basis, the imported raw materials accounted for approximately 14.01% of their raw material cost and export of specialty chemicals accounted for approximately 14.86% of our total revenue from operations. Not a lot, but enough to mention that currency fluctuations will have a bearing on the company’s financials.

ISSUE DETAILS

With a PE of 18 (post issue) the company isn’t cheap either. Hopefully the company can put their recent troubles behind them and continue with their new found formula for growth. We here at Finception wish the company all the best.

No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.